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Pattern Correlation in the Currency Markets

There are the standard trading patterns in the market (i.e., Triangles, Head n Shoulders, Flags, etc.) that occur on a fairly regular basis over time. Many of those you have studied by now, in TIC. One of the things that a short-term system can help to discern in market behavior are ephemeral patterns driven by short-term market behavior.

About 6 months ago, I was talking with a fellow trader about a very short term behavior pattern that I was trading rather profitably. And, with my trading approach, it was easy to spot. It seemed that almost every day, the carry pairs would drop 1-200 pips. Across all the major Carry pairs, smooth and easy, usually a 45 degree move on the 5 minute chart. This move would start anywhere between 2 and 3 PM Eastern. This was obvious on the charts, because price would most often consolidate. Then, pop. The move would break out and not lookback. No tug of war. No jockeying for a better price, like the little dipper or sneak attack. Just a smooth momentum move, with a good entry signal.

Now, like you, I know the value of trading at the best times of the day. But this was way too regular. When I first noticed it, it had been happening for over 8 trading sessions, like clockwork. Well, in my book that’s a trading edge. In Poker, they call that a tell. The market tipping its’ hand about how it is going to behave.

After trading this for a few days, I was asking Mac what the heck might have changed to produce such a regular pattern on a daily basis. He considered the time and the order flow, and pointed out that at that time, the equities markets are in their closing. Bing! The lght bulb went on.

Of course, when the markets are closing with a lower close, AND the funds and banks are all deleveraging, AND the short-term credit has DISAPPEARED, what does a fund that is holding some heavy losses on the books need to do? SETTLEMENT!

They either have to unload their positions, at a loss – and,why would they want to do that when they can push price up to sell off those assets to the ‘paper’ crowd in a few days?(retail traders)

But, just like us, they have to settle on their margin calls, and with no handy investment bank to give them a short-term loan, they need CASH! Ok, now stay with me here. The funds have large debts to settle short-term. They need quick cash. So, what do they do? They use their ATM card – the Carry positions that they have been putting on for the last 5 years. One rough estimate was that at its’ peak the carry trade had over one Trillion dollars parked in those pairs. Short Yen, Long the interest bearing currencies. Which is why when you look at a weekly chart of the EURJPY, GBPJPY, AUDJPY, etc. you see a steady climb over the last few years, and Then – Blam! A nice sharp decline. But, don’t imagine that there isn’t still a good chunk of change in those trades.

So, put money into the carry trade, and the pairs go up. Take money out? Yep, you got it. And, they are all doing the same thing, at the same time. So, there is no push and retrace, no jockeying for advantage. It’s just sell until you have enough cash. A nice smooth move. A nice tradable move. Especially if you open the time filter to say, maybe 4:30 PM est? And, you get a nice clean entry signal in the right direction when you look at the equity markets? Pull the trigger and let the 3 Bar EA follow the move. Sweet!

So, just take a look at your FX charts, and then look at the US equity indices. Dow and S&P down, carry pairs down. Dow and S&P up, carry pairs up, a little softer, but up. Check it out.

This is just an example. The real point is that Trading is about more than squiggly lines and news reports. A trader tries to ‘tune’ himself to the markets. To sense when the currents change enough to offer an edge. I wasn’t looking for anything when I found that. And, one day, if it hasn’t already, it will happen for you the same way. You are just reviewing the day’s trades, glance up at the screen, and suddenly, there is opportunity staring you in the face. Sometimes you have to step back, in order to get the perspective to see it. On any one day, it’s just an odd move. But, after a week and a half……

My Old D.I. Used to say “Once is chance. Twice is coincidence. But, Three times is enemy action.” Once you spot the pattern, all you need is the right approach to exploit it.